Ontario's cap-and-trade system could be undermined by California, environment watchdog warns

Ontario’s environment watchdog sees a big potential pitfall to the province’s cap-and-trade system that starts up in January: an excessive dependence on a vast pool of cheap California pollution credits.

Under that scenario, Ontario businesses will be sending hundreds of millions of dollars annually to California rather than achieving actual emissions reductions here and adapting to a low-carbon economy, Environmental Commissioner Dianne Saxe warns in a new report.

But even so, Saxe says having a cap-and-trade system linked to California and Quebec is still the best way to lower Ontario’s emissions in the long term without dramatically hiking up the cost of fuel, heating, and other expenses on businesses and consumers.

Cap and trade is set to start in Ontario on Jan. 1, with businesses buying allowances from the government to cover their emissions. Each year, the overall limit on emissions is reduced.

In 2018, Ontario will link its market to California and Quebec, which have both had cap and trade in place since 2012. But California’s market is currently awash in allowances that haven’t been selling out in the quarterly auctions, meaning they’re available for cheap when Ontario links up.

“If (businesses) buy such allowances instead of reducing emissions in Ontario, Ontario emissions may not go down much, and there could be a substantial capital outflow to California,” it states. The report notes that number could be as high as $300 million annually by 2020.

Buying California allowances does mean Ontario can claim some emissions reductions there for its own reduction targets, but Saxe said it creates a dangerous complacency.

“If we have too much dependence on California allowances, then we could get stuck,” Saxe said in an interview. “If you haven’t reduced your emissions on a durable basis, then the next year it’s going to be harder, and harder, and harder.”

There are some steps Ontario can take to lessen its dependence on California — such as allowing businesses to buy made-in-Ontario offsets, which fund programs here that reduce greenhouse gases — but ultimately the province is at the mercy of an economy that’s four times as large. It’s possible California’s market will remain over-allocated with allowances for years, keeping them cheap and plentiful.

The allowances are sold in quarterly auctions, which have performed weakly in 2016. Just 11 per cent of allowances on offer were sold in the California-Quebec auction in May, and 35 per cent were sold in August’s auction.

However, the demand significantly rebounded in the most recent auction, with 88 per cent sold in the Nov. 15 auction. It could be a sign that the market is maturing.

The weak auctions this year have created another potential pitfall for Ontario, which is counting on auction revenue to fund up to $8.3 billion in programs for its climate change action plan. When only 11 per cent of allowances sell out, only 11 per cent of the expected revenue is generated.

But Saxe said Ontario’s climate change plan — which includes programs such as electric car incentives and mandatory home energy audits — needs improvement if it’s going to make a significant dent in the province’s emissions.

In particular, she blasted the fact that up to $1.3 billion could be spent on a still-vague promise to “keep electricity rates affordable.” The Liberal government has been badly suffering in the polls when it comes to the expense of hydro, and Saxe said there should be no place in the climate change action plan for such a consideration.

“There’s no reason to think it could reduce greenhouse gases,” she said of a proposed electricity subsidy. “It’s an example of taking the money for political purposes rather than for climate purposes, and I don’t think that is acceptable.”

In its response to Saxe’s report, the Ministry of Energy defended itself but provided no new details.

“The use of cap-and-trade auction proceeds to lower the cost of clean electricity would make it more competitive with traditionally cheaper fossil fuels, providing an incentive to fuel switch from fossil fuels to electricity consistent with the goals of the Climate Change Action Plan,” it said.

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